Alexandre Guillaume
Alexandre Guillaume, Aspect Capital
Alexandre Guillaume’s Mount Olympus style of hedge fund management – cold, calculating and impervious to the emotion of the stock market agora – is actually endemic to all Aspect’s funds. This firm, with $2.2 bn under management, relies only on quantitative data fed through from data provider Worldscope. Free-floating gut instinct, intuition, feelings – such intangibles don’t stand a chance with them.
‘Since our launch in 1999 we’ve been 15 percent up on average per annum,’ boasts Guillaume. ‘We focus on the top 500 European and UK stocks, though not real estate, which is valued too differently for our style of management to be effective.’
Given the kith-and-kin ties some industry players have with auditors and clients, not to mention the ever-lengthening legal shadow of Sarbanes-Oxley, Aspect’s ultra-rational, hands-off technique looks timely. ‘Most analysts get too emotional,’ suggests Guillaume. ‘They become too biased and tend to under-react to bad news. Many of them follow a company but are too closely linked to that company, and when they do cut their estimates, they often do it too slowly. That’s where our system makes money for us – by going short at the right time.’
Any risk of over-extrapolation from past performance is also banished. ‘Nokia was a good example,’ says Guillaume. ‘Many analysts thought it would continue to grow at a high rate, but the data didn’t support this.’
Aspect’s clients, mostly institutional and fund-of-funds investors, come seeking a conservative investment; Guillaume claims a low 11 percent volatility rate. Worth $400 mn and geared up to 2.5 times through its main broker Morgan Stanley, Guillaume’s European equities fund carries a long market bias of 20 percent.
Aspect’s valuation approach relies on traditional P/E , EV-to-sales and other strictly quantitative factors. Some countries are deliberately omitted from the fund – confidence in Greek and Portuguese company information, for example, isn’t high.
But Aspect’s foundation on an omniscient, pure, data-driven approach does have a few chinks. ‘In very special situations when companies are close to bankruptcy, our approach is not applicable – Corus was a good example,’ admits Guillaume. ‘The situation was identified and that stock was removed from our portfolio. Our model was not able to capture the situation because the stock was behaving like an option.’ With extreme volatility, in other words.
But for the most part, Aspect’s strategy – as evidenced by the figures, naturally – has been profitable so far. It also means that Guillaume takes absolutely zero interest in corporate governance and CSR: ‘Our average holding period is four months. We never participate at AGMs or vote.’
Dominic McEwan
Dominic McEwan, Jade Japan fund
Deflation, near zero interest rates, a bombed out Nikkei – no wonder Japanese investors are showing an increased appetite for hedge funds. Dominic McEwan’s $10 mn Jade fund has been going since 2000. With a mix of both long and short positions, McEwan regularly meets Japanese companies en masse when an entire entourage – IROs, CFOs and CEOs – blow into town. ‘The IRO alone could give me an overview and answer most of my questions,’ he points out. ‘If I get just the company president he’s not going to be au fait with the operating margin nitty-gritty. I’m better off asking him about the overall philosophy of the business. It’s good to meet everyone together.’
Although regular IRO contact is important, getting reliable disclosure from primary sources can be a fight. ‘Some Japanese firms tend to be very reluctant to give you gross profit margins by product sector. They still believe that if they publish anything they’re going to risk getting squeezed by the people they’re selling to.’
A fair amount of company information is printed in English on the web, although its true value is debatable, McEwan says. Like other hedge fund managers interviewed here, he advises reading between the lines. ‘Sometimes you can see they’re deliberately trying to give you a hint on how they’re doing. An oil refining firm I talked to a while ago had excavation rights in the South China Sea. You could see there was a kind of twinkle in his eye as the guy was talking. Two weeks later they announced they’d struck gas.’
Local sell-side analysts can also help with on-the-ground intelligence, says McEwan. However cultural barriers can still clap a lid on communication with companies. It’s not the language so much as the protocol: ‘Even if you embrace the language and speak Japanese in a meeting, your level of questioning has to be less severe.’
As far as determining value, models wax and wane. ‘Generally I’m always on the lookout for good quality balance sheets. If there’s debt, I want to see plenty of cash flow. Top-line growth isn’t the be all and end all – in the 1980s that’s all they cared about. Now it’s much more about earnings and rationalization.’
Such rationalization should give Japan a healthy platform when the economy picks itself up, though when that will be remains frustratingly unclear. But the current bust should have a constructive impact on corporate governance, McEwan says: ‘Misleading accounting is more prevalent in boom times, but Japan hasn’t seen a boom since the late 1980s.’
Jonathan Sharpe
Jonathan Sharpe, Gartmore AlphaGen Cepheus
Jonathan Sharpe finds IRO contact useful, but a CFO or CEO generally gets him more flesh-per-pound, he reckons. ‘They can give me the information on long-term strategy and current trading conditions as well as their own assessment of how they see themselves in the marketplace,’ he says. ‘Is their growth strategy acquisition-based, or is it about taking the product to new markets?’
The Gartmore small-cap hedge fund manager usually prefers one-on-one meetings. ‘So I can set the agenda. Time-wise, I can generally get more out of such a meeting as well.’ A one-on-one will also give him a gut feeling for the business and the caliber of staff, he says.
As part of the sifting process, Sharpe always runs a gimlet eye over company press releases about recent acquisitions before a meeting. Quarterly reports are invaluable, but only if they’re out on time – he’s continually irritated by the laid-back attitude of too many companies about getting earnings reports out: ‘If a firm produces its first quarterly report at the end of the second quarter, then it’s pretty academic by that time. Timely reporting is what we need. If enormous US companies can report in a couple of weeks, then smaller companies can do it, too.’
The quarterly notes give Sharpe a grip on depreciation policy and debt; the back-of-the-book notes can also give him division breakdown and profitability.
Because his fund focuses on small European companies, often family-controlled businesses, establishing exactly what commitment a family gives a business can be an issue. ‘Clearly you want professional management. You need to find out how hands-on the family is. Are they as interested in the share price as we are? It’s about an attitude to profitability. Some firms that have been in the family for over 100 years may have a very different time horizon compared to investors,’ Sharpe says.
To square the numbers, Sharpe uses a combination of multiples – P/E and price-to-cash, for example – and earnings before interest. He adds, ‘In the long term the market doesn’t care about DCF [discounted cash flow]. We try and forecast for the next two to three years, and what potentially might happen. But it’s rarely a snap decision.’
Corporate social responsibility is a minor issue for this hedge fund manager, though he likes to see it put in an appearance. Ultimately, it’s trust that wins the day here. ‘Does a company give you clear explanations? Are their interests your interests? Do they want to make the best returns to get share price up – or are they after something else?’
Hugh Hendry
Hugh Hendry, Odey
Odey’s Hugh Hendry has been busy buying long lately. He’s feeling – just a smidge – optimistic. But his confidence doesn’t stem from recent contact with IROs. He says it comes more from a dialogue with the market itself: ‘The best way is to be remote from the noise of the marketplace. That’s a very different approach from having discussions with management – I’ve been there, done that. My investment record has increased dramatically now that I’m not keeping company with stockbrokers or CEOs.’
But Hendry does use research analysts for the laborious spadework. What they all love – Hendry plus five diggers – is annual reports printed on coarse, dirt-cheap paper. ‘I don’t need photographs and I like to see the CEO owning shares himself and some words extolling common sense. Why do you need a photograph of the CEO? All that stuff sends a terrible notice to those who have put their trust in your assets. I often get couriers delivering reports with embossed typefaces telling me the most inane things, and that all costs money.’
In terms of hard figures, Hendry favors enterprise value: today’s market cap plus the net debt of the business. Divided by the revenue figure, this gives him the EV-to-sales. ‘Generally we like low EV-to-sales as opposed to high. Ideally we’d pay no more than one times revenue making 10 percent profit.’
Even better, wait until the business is waist-deep in controversy, he says: ‘If I can buy on 30 percent of sales, that would represent tremendous good value – an annual return of 30 percent.’
Buying cheap – rock-bottom cheap – is a constant theme for Hendry. In a perfect Odey universe, this would be coupled with near-decrepit business premises. Lubricant legend WD-40, based in San Diego, is a good example of this. ‘We were trying to find the place and even the taxi driver couldn’t find it!’ he enthuses. ‘Their only asset is their vat of secret ingredients – that’s it. Some guy collects the stuff, someone else brands it, another sells it. It’s a brilliant, down-at-heel approach. These guys will go to the most enormous lengths not to spend your money.’
Hendry hardly uses the web as a resource and corporate governance issues are similarly low down the priority list. But he does read eminent Wall Street pundit Richard Russell daily. Like Russell, Hendry starts with the most enormous respect for market prices: ‘In some respects, the market is the genuine article – we extrapolate from that.’
Brian Cohen
Brian Cohen, Schultze Asset Management
Mention investor relations to hedge fund manager Brian Cohen, who runs the $40 mn distressed securities fund Schultze Asset Management with partner George Schultze, and he’s clear about what he wants: full financial details every quarter. ‘There’s no reason why they can’t do it: cash flow, income, capex – it’s basic stuff. But I spend a lot of time following up just trying to get the basic numbers.’
Other information – write-offs, for example – can also be cloaked in corporate jargon that takes ages to unclog, Cohen says, exclaiming, ‘Special charges? What are these? Are they just a one-off or something else?’
Unfortunately, some of the answers he gets back from IROs frustrate the winnowing process even further. Feedback must be backed up, he says. ‘It’s very easy for someone to say they’re going to cut costs, but as investors we need to know exactly how they’re going to do it.’
Cohen and Schultze, who specialize in companies going through bankruptcy, like to see strong management at the helm; they also like to know what that robust, focused management team is doing to uphold shareholder value.
‘Recently we looked at Regal Entertainment Group,’ says Cohen. ‘It just issued a $5 dividend per share. In fact it’s issuing new debt and securities to pay out a special dividend of $600 mn. It’s leveraging debt, obviously. It might have the flexibility to do it, but that could be a warning sign as far as we’re concerned.’
Companies with solid assets tend to go down well. ‘That means straightforward asset value and free cash flow multiples,’ Cohen remarks.
The Schultze fund takes both long and short positions to maximize returns and spread risk. All company reports are subjected to a tough going-over. Corporate governance is extremely important and the Sox reforms are a positive step, the two managers believe. ‘Some financial statements almost read like another language,’ complains Cohen. ‘But things have improved compared to two years ago.’
